Retail Assortment Planning in the Presence of Consumer Search

Consumers often know what kind of product they wish to purchase, but do not know which speci...c variant best ...ts their needs, so consumers shop around. As a result, a consumer may ...nd an acceptable product in one store but nevertheless purchase nothing, opting to continue searching for an even better product. We study three versions of the retail assortment problem: a traditional, no-search, version that does not explicitly consider consumer search and two versions that implement two di¤erent consumer search models. In each of the three versions we use the multinomial logit to model consumer choice. Our analysis suggests the retailer’s decision to add a product to an assortment should not only consider the direct costs and revenues of the product, but also anticipate the indirect bene...t an extended assortment has in preventing consumer search. For example, we show it may even be optimal to add an unpro...table product to an assortment so as to prevent consumer search. We also test whether the no-search version of assortment planning could perform well in practice. In particular, we presume a retailer implements no-search assortment planning with the following iteration: an assortment is chosen, sales data are collected, a consumer choice model is ...tted to the data, a new assortment is chosen, etc. We show that this iteration can lead to a heuristic equilibrium: there exists an assortment that is optimal given the previously observed sales data and the sales data observed with that assortment recommends the same assortment. We demonstrate that the heuristic equilibrium assortment is never deeper than optimal and often contains fewer variants than optimal. The pro...t loss from the heuristic equilibrium assortment can be substantial: in some extreme cases the no-search assortment planning model recommends killing the category (i.e., stocking no products) even though the optimal assortment is pro...table. We conclude that retailers should be careful when considering a reduction in their assortment if they sell in a market characterized by consumer search.